the first us-listed bitcoin etfs are
likely to launch this week after an
eight-year battle to win sec approval
the 75-day period during which the sec
could object expires at midnight today
the pro shares bitcoin strategy etf will
probably launch on tuesday with the
ticker symbol b-i-t-o
and on wednesday the invesco bitcoin
strategy etf should also be allowed to
launch unless they're blocked by the sec
at the last minute so let's discuss how
these new funds differ from other crypto
etfs that the sec has rejected in the
past and what will you actually get if
you buy one of these financial products
now it's worth noting that these will
not be the first crypto exchange traded
products in the world just the first on
u.s equity exchanges there are almost 50
similar products available worldwide
even with some inverse payoffs which
rise in value when a given
cryptocurrency falls and vice versa in
total there's around 14 billion dollars
invested in this type of product
worldwide right now but these will be
the first u.s exchange listed products
an etf which stands for exchange-traded
fund is an asset that trades on the open
market like a stock and is available to
regular investors some companies like
grayscale have products that offer
bitcoin exposure to american investors
already but they are only available to
qualified wealthy investors and the
shares often trade at a price that
doesn't match the underlying
cryptocurrency
these ets will be based on bitcoin
futures contracts rather than actual
bitcoin and gary gensler the chairman of
the sec has hinted that he's more
comfortable with the trading on
regulated futures exchanges as opposed
to the trading that occurs on crypto
exchanges the sec has previously shown
concern about liquidity and the risk of
price manipulation on bitcoin exchanges
so why have these been accepted by the
sec well unlike the other bitcoin etfs
that the sec has rejected in the past
these two funds are based on futures
contracts and were filed under mutual
fund rules that the sec has said
provides significant investor
protections so why are the sec happier
with this type of etf compared to an etf
that just holds
the answer is that this type of product
is a lot more standard especially
because bitcoin futures already trade on
regulated u.s futures exchanges and
they've been available for quite a while
this is really just a repackaging of
this already existing financial product
such that it can be traded on an equity
exchange rather than a futures exchange
and as such it's not really
revolutionary and to the sec it's a
fairly standard financial product if
something goes wrong on a regulated
futures exchange the sec knows how to
deal with it and they're better able to
step in investigate and intervene
an etf based on actual bitcoins on the
other hand would be harder for the sec
to approve as the coins trade in a lot
of different locations most of which are
not necessarily subject to much u.s
regulatory oversight
if something went wrong on an
unregulated bitcoin exchange and u.s
investors lost money the sec could look
quite bad
with a futures-based etf the issue of
custody of bitcoins is entirely
sidestepped the futures are a bet on the
price change of bitcoin but there's no
requirement to store bitcoins so the sec
doesn't have to worry about theft or
loss of passwords or anything like that
so who might want to use etfs to invest
in bitcoin especially when we know that
a lot of the people who want to invest
in bitcoin already have done so and
futures are already available well
financial advisors for example might
want to use these products to give their
investors exposure to the asset class
without trading on an unregulated
exchange and without signing their
clients up for a futures trading account
now while the sec sees these products as
being more appropriate for retail
investors than trading in the underlying
bitcoin spot market these etfs most
likely won't give investors the same
returns as they would get by just buying
bitcoin directly
if you buy shares in a regular stock etf
without going into too much detail the
fund basically takes your money and uses
it to buy shares of the stocks in the
index that the etf tracks if you buy one
of these bitcoin etfs instead of the
money going into bitcoin around one
third of the money will be used as
margin at a futures exchange and the
rest of the money goes into an
interest-bearing account that contains
money market securities the money being
used as margin at an exchange is there
to collateralize the futures contract
which is a bet with a counterparty that
gives you a payoff tied to the return of
bitcoin if bitcoin goes up in price more
money is transferred into your account
and if bitcoin falls in value some of
your money goes to pay the person on the
other side of that future's bad so
buying this etf does not give you actual
bitcoin you basically get a pool of cash
plus a bet on the price direction of
bitcoin you might then wonder if a
structure like this means that for you
to be able to bet that the price of
bitcoin will rise does someone else need
to be betting that the price will fall
and the answer is that they do
but there is a good chance that this
person the person on the other side of
your futures trade won't just be making
that bad odds are pretty good that the
person who has sold the futures
contracts to the etf will be buying
actual bitcoins as a hedge so that
person an arbitrager will buy actual
bitcoins and then hedge their trade by
selling bitcoin futures short
right now bitcoin is trading at around
sixty thousand dollars so they will be
spending sixty thousand dollars on a
bitcoin and then they'll have to post
around twenty thousand dollars in margin
one third the price of bitcoin at the
futures exchange in order to be allowed
to sell bitcoin futures short
putting this trade on will consume
eighty thousand dollars of their capital
now as i mentioned earlier the etf puts
up one-third of the capital to buy
bitcoin futures and keeps the rest in an
interest-bearing account the arbitrage
error must instead put up the full cost
of a coin plus margin so 80 000 in total
to provide that futures contract to the
etf the arbitrager is also exposed to
the security risk of their bitcoins
being stolen by a hacker or problems at
the bitcoin exchange that they use
retail investors who buy the etf are
exposed to the much more manageable
credit risk of a registered us commodity
futures exchange which seems a lot
better so why would an arbitrager choose
to do this to tie up this much capital
and to take these risks the answer is
that they will only do it if they can
charge for that service so they need to
be able to charge you somehow for the
use of their capital and be compensated
for the risk that they're taking in
dealing with actual bitcoins and
exchanges that the sec are protecting
retail investors from
so the way that futures work and thus
futures based etfs is that you as an
investor are often paying someone else
to store the underlying product for you
this applies to bitcoin etfs but also
things like oil etfs
over time futures based etfs can make
and lose money for their end investors
based on divergences in the prices of
the futures with the products that they
track
bitcoin futures typically but not always
trade with a modestly upward sloping
curve which is known as contango this
means that the longer dated bitcoin
futures tend to trade at a higher price
than short-term or soon-to-expire
contracts this can lead to lower returns
or losses for the etf investors as the
etf has to sell their soon-to-expire
contracts the ones that are trading
cheap and use the proceeds to buy the
more expensive long-dated contracts so
when you look at the price of bitcoin
futures you'll see that they tend to
trade at a premium of around eight
percent above the price of bitcoin right
now the premium is around 15
possibly because traders are positioning
themselves in advance of the etf's
approval so buying this etf right now
means paying 15 more for bitcoin
exposure than you'd pay by just buying
actual bitcoins on top of that the etf
charges a management fee for the pro
shares one that fee is 95 bip so just
under a percent a year in management
fees the question then is why would
anyone buy this bitcoin etf instead of
just buying actual bitcoins we discussed
the problem of storage a while back in a
video i made when oil prices went
negative it's fairly understandable why
you don't buy oil and store it in your
house your family would complain and i
guess there are probably environmental
maybe even fire regulations about
filling up your swimming pool or your
bathtub with crude oil bitcoin on the
other hand used to be a bit trickier to
own a few years ago but today you can
buy actual bitcoins on a brokerage
platform like robinhood you can open an
account at coinbase or you can even
trade bitcoin futures on a u.s regulated
exchange it's not entirely obvious to me
the financial need for a product like
this
so while the sec believes bitcoin
futures are more appropriate for retail
investors than actual bitcoins these new
etfs are unlikely to provide investors
with the same returns
let me know your thoughts in the
comments section below and if you're
excited about these new products if you
found this video interesting you'll
probably enjoy my recent video on the
biggest fat finger trading errors which
starts out with some recent examples
from the crypto space
see you guys later bye
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